What is Due Diligence in Real Estate?

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Performing due diligence before buying a house is one of the best ways you can safeguard your interests and money. Buying a house is one of the biggest investments you’ll make in your lifetime, so it’s essential you do your research before committing. But what does buyer due diligence involve and how do you do it? Read on to learn more or speak to our expert conveyancers.

  1. What is due diligence in property purchase?
  2. Why is due diligence important in property?
  3. How to do due diligence on a property
  4. Talk to us before buying a property

What is due diligence in property purchase?

Due diligence before buying a house involves checking the physical and financial condition of the property and the area it’s located in. It’s typically done before you make an offer and the contract is accepted. It could also involve things like: looking at property value trends, building and pest inspections, checking for a caveat on the property, and so on.

Related information:

Why is due diligence important in property?

Performing due diligence before buying a house is a way to get all the information and facts on the table before you commit. It helps the purchaser understand the true value of the property as well as any risks involved. Due diligence on property purchases are always recommended, whether you’re a first home buyer or a seasoned property investor.

How to do due diligence on a property

To do due diligence before buying a house, there are a few things you will need to check and ask. They include the following:

1. Research the market

Before you sign a contract, it’s important you understand how much the property is worth. Take a look at the properties that have recently sold in the area and compare them to the property you’re considering. This should give you a better idea of how much you should be offering.

2. Ensure the property aligns with the plan

You will find that there is a copy of the Land Title deed attached to the contract of sale. This is not always easy to read, especially if the property is part of a strata title.

You need to check whether the property you have inspected is the same property that is on the plan. To verify this, you need to obtain an identification survey. The surveyor will conduct the survey on the property and prepare a plan, which will contain the following:

  • Dimensions of the land;
  • Location of the property in relation to the other houses and cross streets; and
  • Confirmation that the building is properly sited on the land so that the council would not require any part of the building to be demolished.

3. Check the usage of the property

You must check whether you can use the property for your intended purpose. You can confirm this by either checking the zoning certificate, the Section 149 Certificate, in the contract for sale or by speaking to the town planning section at the local council.

4. Review what is included in the contract of sale

Usually there are no doubts as to what is included in the contract for sale. However, in many instances, the buyer expects the property to be in a particular condition, which is different to what the seller is actually offering.

Sale of a property includes all fixtures, which are items attached to the property or are part of the structure. However, the purchase does not normally include anything removable, unless stipulated in the contract.

5. Consider the Strata Title

If you are buying a property such as a residential unit or a commercial unit in New South Wales, the property will be administered by the Owners Corporation, which is also known as a Body Corporate, in accordance with its obligations under the Strata Schemes Management Act 1996. You will be required to pay levies to the Owners Corporation to contribute to the management of the building and grounds.

You need to arrange to carry out a search of the books of the Owners Corporation to find out the levies you are required to pay, the present financial position and what amounts it may have set aside for future maintenance. The Minutes of the Council of the Owners Corporation also indicate whether there are any issues or problems with the building or any disputes among the existing owners. If you have any questions about this, you can always speak to our strata lawyer team.

6. Review home building insurance

Builder warranty insurance is always present in the contract of sale if any building work has been done in the previous 6 years, the value of which exceeds $12,000. In case a building agreement is in place, the seller must attach an Insurance Certificate to the house contract.

Before entering into the contract of sale, you should obtain details from the seller about the existing insurance cover for the property and the procedures available for the resolution of any dispute that may arise.

7. Conduct title searches

Checking if there are any encumbrances, easements or caveats on the property is incredibly important when you’re buying a property. Encumbrances, for example, can restrict the use of the land while a caveat can prevent the sale of a house. This type of due diligence is something your conveyancer will help you with.

8. Check sewer connections

Drainage or sewer plans are normally included in the contract of sale showing the location of any sewer mains and the connections from the building to the sewer.

If you have plans to carry out any extensions to the building that might get close to/go over the sewer, you may not get building approval or the building costs may increase substantially. As a property investor, this kind of property development due diligence can be crucial.

9. Book building and pest inspections

This type of buyer due diligence usually happens after you’ve signed the contract and have entered the cooling off period. Getting a building and pest inspection on the property you’re purchasing is critical, because it gives you a clear picture of the state of the house.

Learn more: what is the cooling off period?

Talk to us about due diligence before buying a house

If you are planning to purchase a property, Owen Hodge can help you to carry out the appropriate due diligence checks and ensure your property transaction runs as smoothly as possible. Get in touch with our property lawyers or conveyancing team today.

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